Archives For intercollegiate sports

The U.S. Supreme Court will hear a challenge next month to the 9th U.S. Circuit Court of Appeals’ 2020 decision in NCAA v. Alston. Alston affirmed a district court decision that enjoined the National Collegiate Athletic Association (NCAA) from enforcing rules that restrict the education-related benefits its member institutions may offer students who play Football Bowl Subdivision football and Division I basketball.

This will be the first Supreme Court review of NCAA practices since NCAA v. Board of Regents in 1984, which applied the antitrust rule of reason in striking down the NCAA’s “artificial limit” on the quantity of televised college football games, but also recognized that “this case involves an industry in which horizontal restraints on competition are essential if the product [intercollegiate athletic contests] is to be available at all.” Significantly, in commenting on the nature of appropriate, competition-enhancing NCAA restrictions, the court in Board of Regents stated that:

[I]n order to preserve the character and quality of the [NCAA] ‘product,’ athletes must not be paid, must be required to attend class, and the like. And the integrity of the ‘product’ cannot be preserved except by mutual agreement; if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the playing field might soon be destroyed. Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as a result enables a product to be marketed which might otherwise be unavailable. In performing this role, its actions widen consumer choice – not only the choices available to sports fans but also those available to athletes – and hence can be viewed as procompetitive. [footnote citation omitted]

One’s view of the Alston case may be shaped by one’s priors regarding the true nature of the NCAA. Is the NCAA a benevolent Dr. Jekyll, which seeks to promote amateurism and fairness in college sports to the benefit of student athletes and the general public?  Or is its benevolent façade a charade?  Although perhaps a force for good in its early years, has the NCAA transformed itself into an evil Mr. Hyde, using restrictive rules to maintain welfare-inimical monopoly power as a seller cartel of athletic events and a monopsony employer cartel that suppresses athletes’ wages? I will return to this question—and its bearing on the appropriate resolution of this legal dispute—after addressing key contentions by both sides in Alston.

Summarizing the Arguments in NCAA v Alston

The Alston class-action case followed in the wake of the 9th Circuit’s decision in O’Bannon v. NCAA (2015). O’Bannon affirmed in large part a district court’s ruling that the NCAA illegally restrained trade, in violation of Section 1 of the Sherman Act, by preventing football and men’s basketball players from receiving compensation for the use of their names, images, and likenesses. It also affirmed the district court’s injunction insofar as it required the NCAA to implement the less restrictive alternative of permitting athletic scholarships for the full cost of attendance. (I commented approvingly on the 9th Circuit’s decision in a previous TOTM post.) 

Subsequent antitrust actions by student-athletes were consolidated in the district court. After a bench trial, the district court entered judgment for the student-athletes, concluding in part that NCAA limits on education-related benefits were unreasonable restraints of trade. It enjoined those limits but declined to hold that other NCAA limits on compensation unrelated to education likewise violated Section 1.

In May 2020, a 9th Circuit panel held that the district court properly applied the three-step Sherman Act Section 1 rule of reason analysis in determining that the enjoined rules were unlawful restraints of trade.

First, the panel concluded that the student-athletes carried their burden at step one by showing that the restraints produced significant anticompetitive effects within the relevant market for student-athletes’ labor.

At step two, the NCAA was required to come forward with evidence of the restraints’ procompetitive effects. The panel endorsed the district court’s conclusion that only some of the challenged NCAA rules served the procompetitive purpose of preserving amateurism and thus improving consumer choice by maintaining a distinction between college and professional sports. Those rules were limits on above-cost-of-attendance payments unrelated to education, the cost-of-attendance cap on athletic scholarships, and certain restrictions on cash academic or graduation awards and incentives. The panel affirmed the district court’s conclusion that the remaining rules—restricting non-cash education-related benefits—did nothing to foster or preserve consumer demand. The panel held that the record amply supported the findings of the district court, which relied on demand analysis, survey evidence, and NCAA testimony.

The panel also affirmed the district court’s conclusion that, at step three, the student-athletes showed that any legitimate objectives could be achieved in a substantially less restrictive manner. The district court identified a less restrictive alternative of prohibiting the NCAA from capping certain education-related benefits and limiting academic or graduation awards or incentives below the maximum amount that an individual athlete may receive in athletic participation awards, while permitting individual conferences to set limits on education-related benefits. The panel held that the district court did not clearly err in determining that this alternative would be virtually as effective in serving the procompetitive purposes of the NCAA’s current rules and could be implemented without significantly increased cost.

Finally, the panel held that the district court’s injunction was not impermissibly vague and did not usurp the NCAA’s role as the superintendent of college sports. The panel also declined to broaden the injunction to include all NCAA compensation limits, including those on payments untethered to education. The panel concluded that the district court struck the right balance in crafting a remedy that both prevented anticompetitive harm to student-athletes while serving the procompetitive purpose of preserving the popularity of college sports.

The NCAA appealed to the Supreme Court, which granted the NCAA’s petition for certiorari Dec. 16, 2020. The NCAA contends that under Board of Regents, the NCAA rules regarding student-athlete compensation are reasonably related to preserving amateurism in college sports, are procompetitive, and should have been upheld after a short deferential review, rather than the full three-step rule of reason. According to the NCAA’s petition for certiorari, even under the detailed rule of reason, the 9th Circuit’s decision was defective. Specifically:

The Ninth Circuit … relieved plaintiffs of their burden to prove that the challenged rules unreasonably restrain trade, instead placing a “heavy burden” on the NCAA … to prove that each category of its rules is procompetitive and that an alternative compensation regime created by the district court could not preserve the procompetitive distinction between college and professional sports. That alternative regime—under which the NCAA must permit student-athletes to receive unlimited “education-related benefits,” including post-eligibility internships that pay unlimited amounts in cash and can be used for recruiting or retention—will vitiate the distinction between college and professional sports. And via the permanent injunction the Ninth Circuit upheld, the alternative regime will also effectively make a single judge in California the superintendent of a significant component of college sports. The Ninth Circuit’s approval of this judicial micromanagement of the NCAA denies the NCAA the latitude this Court has said it needs, and endorses unduly stringent scrutiny of agreements that define the central features of sports leagues’ and other joint ventures’ products. The decision thus twists the rule of reason into a tool to punish (and thereby deter) procompetitive activity.

Two amicus briefs support the NCAA’s position. One, filed on behalf of “antitrust law and business school professors,” stresses that the 9th Circuit’s decision misapplied the third step of the rule of reason by requiring defendants to show that their conduct was the least restrictive means available (instead of requiring plaintiff to prove the existence of an equally effective but less restrictive rule). More broadly:

[This approach] permits antitrust plaintiffs to commandeer the judiciary and use it to regulate and modify routine business conduct, so long as that conduct is not the least restrictive conduct imaginable by a plaintiff’s attorney or district judge. In turn, the risk that procompetitive ventures may be deemed unlawful and subject to treble damages liability simply because they could have operated in a marginally less restrictive manner is likely to chill beneficial business conduct.

A second brief, filed on behalf of “antitrust economists,” emphasizes that the NCAA has adapted the rules governing design of its product (college amateur sports) over time to meet consumer demand and to prevent colleges from pursuing their own interests (such as “pay to  play”) in ways that would conflict with the overall procompetitive aims of the collaboration. While acknowledging that antitrust courts are free to scrutinize collaborations’ rules that go beyond the design of the product itself (such as the NCAA’s broadcast restrictions), the brief cites key Supreme Court decisions (NCAA v. Board of Regents and Texaco Inc. v. Dagher), for the proposition that courts should stay out of restrictions on the core activity of the joint venture itself. It then summarizes the policy justification for such judicial non-interference:

Permitting judges and juries to apply the Sherman Act to such decisions [regarding core joint venture activity] will inevitably create uncertainty that undermines innovation and investment incentives across any number of industries and collaborative ventures. In these circumstances, antitrust courts would be making public policy regarding the desirability of a product with particular features, as opposed to ferreting out agreements or unilateral conduct that restricts output, raises prices, or reduces innovation to the detriment of consumers.

In their brief opposing certiorari, counsel for Alston take the position that, in reality, the NCAA is seeking a special antitrust exemption for its competitively restrictive conduct—an issue that should be determined by Congress, not courts. Their brief notes that the concept of “amateurism” has changed over the years and that some increases in athletes’ compensation have been allowed over time. Thus, in the context of big-time college football and basketball:

[A]mateurism is little more than a pretext. It is certainly not a Sherman Act concept, much less a get-out-of-jail-free card that insulates any particular set of NCAA restraints from scrutiny.

Who Has the Better Case?

The NCAA’s position is a strong one. Association rules touching on compensation for college athletes are part of the core nature of the NCAA’s “amateur sports” product, as the Supreme Court stated (albeit in dictum) in Board of Regents. Furthermore, subsequent Supreme Court jurisprudence (see 2010’s American Needle Inc. v. NFL) has eschewed second-guessing of joint-venture product design decisions—which, in the case of the NCAA, involve formulating the restrictions (such as whether and how to compensate athletes) that are deemed key to defining amateurism.

The Alston amicus curiae briefs ably set forth the strong policy considerations that support this approach, centered on preserving incentives for the development of efficient welfare-generating joint ventures. Requiring joint venturers to provide “least restrictive means” justifications for design decisions discourages innovative activity and generates costly uncertainty for joint-venture planners, to the detriment of producers and consumers (who benefit from joint-venture innovations) alike. Claims by defendant Alston that the NCAA is in effect seeking to obtain a judicial antitrust exemption miss the mark; rather, the NCAA merely appears to be arguing that antitrust should be limited to evaluating restrictions that fall outside the scope of the association’s core mission. Significantly, as discussed in the NCAA’s brief petitioning for certiorari, other federal courts of appeals decisions in the 3rd, 5th, and 7th Circuits have treated NCAA bylaws going to the definition of amateurism in college sports as presumptively procompetitive and not subject to close scrutiny. Thus, based on the arguments set forth by litigants, a Supreme Court victory for the NCAA in Alston would appear sound as a matter of law and economics.

There may, however, be a catch. Some popular commentary has portrayed the NCAA as a malign organization that benefits affluent universities (and their well-compensated coaches) while allowing member colleges to exploit athletes by denying them fair pay—in effect, an institutional Mr. Hyde.

What’s more, consistent with the Mr. Hyde story, a number of major free-market economists (including, among others, Nobel laureate Gary Becker) have portrayed the NCAA as an anticompetitive monopsony employer cartel that has suppressed the labor market demand for student athletes, thereby limiting their wages, fringe benefits, and employment opportunities. (In a similar vein, the NCAA is seen as a monopolist seller cartel in the market for athletic events.) Consistent with this perspective, promoting the public good of amateurism (the Dr. Jekyll story) is merely a pretextual façade (a cover story, if you will) for welfare-inimical naked cartel conduct. If one buys this alternative story, all core product restrictions adopted by the NCAA should be fair game for close antitrust scrutiny—and thus, the 9th Circuit’s decision in Alston merits affirmation as a matter of antitrust policy.

There is, however, a persuasive response to the cartel story, set forth in Richard McKenzie and Dwight Lee’s essay “The NCAA:  A Case Study of the Misuse of the Monopsony and Monopoly Models” (Chapter 8 of their 2008 book “In Defense of Monopoly:  How Market Power Fosters Creative Production”). McKenzie and Lee examine the evidence bearing on economists’ monopsony cartel assertions (and, in particular, the evidence presented in a 1992 study by Arthur Fleischer, Brian Goff, and Richard Tollison) and find it wanting:

Our analysis leads inexorably to the conclusion that the conventional economic wisdom regarding the intent and consequences of NCAA restrictions is hardly as solid, on conceptual grounds, as the NCAA critics assert, often without citing relevant court cases. We have argued that the conventional wisdom is wrong in suggesting that, as a general proposition,

• college athletes are materially “underpaid” and are “exploited”;

• cheating on NCAA rules is prima facie evidence of a cartel intending to restrict employment and suppress athletes’ wages;

• NCAA rules violate conventional antitrust doctrine;          

• barriers to entry ensure the continuance of the NCAA’s monopsony powers over athletes.

No such entry barriers (other than normal organizational costs, which need to be covered to meet any known efficiency test for new entrants) exist. In addition, the Supreme Court’s decision in NCAA indicates that the NCAA would be unable to prevent through the courts the emergence of competing athletic associations. The actual existence of other athletic associations indicates that entry would be not only possible but also practical if athletes’ wages were materially suppressed.

Conventional economic analysis of NCAA rules that we have challenged also is misleading in suggesting that collegiate sports would necessarily be improved if the NCAA were denied the authority to regulate the payment of athletes. Given the absence of legal barriers to entry into the athletic association market, it appears that if athletes’ wages were materially suppressed (or as grossly suppressed as the critics claim), alternative sports associations would form or expand, and the NCAA would be unable to maintain its presumed monopsony market position. The incentive for colleges and universities to break with the NCAA would be overwhelming.

From our interpretation of NCAA rules, it does not follow necessarily that athletes should not receive any more compensation than they do currently. Clearly, market conditions change, and NCAA rules often must be adjusted to accommodate those changes. In the absence of entry barriers, we can expect the NCAA to adjust, as it has adjusted, in a competitive manner its rules of play, recruitment, and retention of athletes. Our central point is that contrary to the proponents of the monopsony thesis, the collegiate athletic market is subject to the self-correcting mechanism of market pressures. We have reason to believe that the proposed extension of the antitrust enforcement to the NCAA rules or proposed changes in sports law explicitly or implicitly recommended by the proponents of the cartel thesis would be not only unnecessary but also counterproductive.

Although a closer examination of the McKenzie and Lee’s critique of the economists’ cartel story is beyond the scope of this comment, I find it compelling.

Conclusion

In sum, the claim that antitrust may properly be applied to combat the alleged “exploitation” of college athletes by NCAA compensation regulations does not stand up to scrutiny. The NCAA’s rules that define the scope of amateurism may be imperfect, but there is no reason to think that empowering federal judges to second guess and reformulate NCAA athletic compensation rules would yield a more socially beneficial (let alone optimal) outcome. (Believing that the federal judiciary can optimally reengineer core NCAA amateurism rules is a prime example of the Nirvana fallacy at work.)  Furthermore, a Supreme Court decision affirming the 9th Circuit could do broad mischief by undermining case law that has accorded joint venturers substantial latitude to design the core features of their collective enterprise without judicial second-guessing. It is to be hoped that the Supreme Court will do the right thing and strongly reaffirm the NCAA’s authority to design and reformulate its core athletic amateurism product as it sees fit.

Yesterday Learfield and IMG College inked their recently announced merger. Since the negotiations were made public several weeks ago, the deal has garnered some wild speculation and potentially negative attention. Now that the merger has been announced, it’s bound to attract even more attention and conjecture.

On the field of competition, however, the market realities that support the merger’s approval are compelling. And, more importantly, the features of this merger provide critical lessons on market definition, barriers to entry, and other aspects of antitrust law related to two-sided and advertising markets that can be applied to numerous matters vexing competition commentators.

First, some background

Learfield and IMG specialize in managing multimedia rights (MMRs) for intercollegiate sports. They are, in effect, classic advertising intermediaries, facilitating the monetization by colleges of radio broadcast advertising and billboard, program, and scoreboard space during games (among other things), and the purchase by advertisers of access to these valuable outlets.

Although these transactions can certainly be (and very often are) entered into by colleges and advertisers directly, firms like Learfield and IMG allow colleges to outsource the process — as one firm’s tag line puts it, “We Work | You Play.” Most important, by bringing multiple schools’ MMRs under one roof, these firms can reduce the transaction costs borne by advertisers in accessing multiple outlets as part of a broad-based marketing plan.

Media rights and branding are a notable source of revenue for collegiate athletic departments: on average, they account for about 3% of these revenues. While they tend to pale in comparison to TV rights, ticket sales, and fundraising, for major programs, MMRs may be the next most important revenue source after these.

Many collegiate programs retain some or all of their multimedia rights and use in-house resources to market them. In some cases schools license MMRs through their athletic conference. In other cases, schools ink deals to outsource their MMRs to third parties, such as Learfield, IMG, JMI Sports, Outfront Media, and Fox Sports, among several others. A few schools even use professional sports teams to manage their MMRs (the owner of the Red Sox manages Boston College’s MMRs, for example).

Schools switch among MMR managers with some regularity, and, in most cases apparently, not among the merging parties. Michigan State, for example, was well known for handling its MMRs in-house. But in 2016 the school entered into a 15-year deal with Fox Sports, estimated at minimum guaranteed $150 million. In 2014 Arizona State terminated its MMR deal with IMG and took it MMRs in-house. Then, in 2016, the Sun Devils entered into a first-of-its-kind arrangement with the Pac 12 in which the school manages and sells its own marketing and media rights while the conference handles core business functions for the sales and marketing team (like payroll, accounting, human resources, and employee benefits). The most successful new entrant on the block, JMI Sports, won Kentucky, Clemson, and the University of Pennsylvania from Learfield or IMG. Outfront Media was spun off from CBS in 2014 and has become one of the strongest MMR intermediary competitors, handling some of the biggest names in college sports, including LSU, Maryland, and Virginia. All told, eight recent national Division I champions are served by MMR managers other than IMG and Learfield.

The supposed problem

As noted above, the most obvious pro-competitive benefit of the merger is in the reduction in transaction costs for firms looking to advertise in multiple markets. But, in order to confer that benefit (which, of course, also benefits the schools, whose marketing properties become easier to access), that also means a dreaded increase in size, measured by number of schools’ MMRs managed. So is this cause for concern?

Jason Belzer, a professor at Rutgers University and founder of sports consulting firm, GAME, Inc., has said that the merger will create a juggernaut — yes, “a massive inexorable force… that crushes whatever is in its path” — that is likely to invite antitrust scrutiny. The New York Times opines that the deal will allow Learfield to “tighten its grip — for nearly total control — on this niche but robust market,” “surely” attracting antitrust scrutiny. But these assessments seem dramatically overblown, and insufficiently grounded in the dynamics of the market.

Belzer’s concerns seem to be merely the size of the merging parties — again, measured by the number of schools’ rights they manage — and speculation that the merger would bring to an end “any” opportunity for entry by a “major” competitor. These are misguided concerns.

To begin, the focus on the potential entry of a “major” competitor is an odd standard that ignores the actual and potential entry of many smaller competitors that are able to win some of the most prestigious and biggest schools. In fact, many in the industry argue — rightly — that there are few economies of scale for colleges. Most of these firms’ employees are dedicated to a particular school and those costs must be incurred for each school, no matter the number, and borne by new entrants and incumbents alike. That means a small firm can profitably compete in the same market as larger firms — even “juggernauts.” Indeed, every college that brings MMR management in-house is, in fact, an entrant — and there are some big schools in big conferences that manage their MMRs in-house.

The demonstrated entry of new competitors and the transitions of schools from one provider to another or to in-house MMR management indicate that no competitor has any measurable market power that can disadvantage schools or advertisers.

Indeed, from the perspective of the school, the true relevant market is no broader than each school’s own rights. Even after the merger there will be at least five significant firms competing for those rights, not to mention each school’s conference, new entrants, and the school itself.

The two-sided market that isn’t really two-sided

Standard antitrust analysis, of course, focuses on consumer benefits: Will the merger make consumers better off (or no worse off)? But too often casual antitrust analysis of two-sided markets trips up on identifying just who the consumer is — and what the relevant market is. For a shopping mall, is the consumer the retailer or the shopper? For newspapers and search engines, is the customer the advertiser or the reader? For intercollegiate sports multimedia rights licensing, is the consumer the college or the advertiser?

Media coverage of the anticipated IMG/Learfield merger largely ignores advertisers as consumers and focuses almost exclusively on the the schools’ relationship with intermediaries — as purchasers of marketing services, rather than sellers of advertising space.

Although it’s difficult to identify the source of this odd bias, it seems to be based on the notion that, while corporations like Coca-Cola and General Motors have some sort of countervailing market power against marketing intermediaries, universities don’t. With advertisers out of the picture, media coverage suggests that, somehow, schools may be worse off if the merger were to proceed. But missing from this assessment are two crucial facts that undermine the story: First, schools actually have enormous market power; and, second, schools compete in the business of MMR management.

This second factor suggests, in fact, that sometimes there may be nothing special about two-sided markets sufficient to give rise to a unique style of antitrust analysis.

Much of the antitrust confusion seems to be based on confusion over the behavior of two-sided markets. A two-sided market is one in which two sets of actors interact through an intermediary or platform, which, in turn, facilitates the transactions, often enabling transactions to take place that otherwise would be too expensive absent the platform. A shopping mall is a two-sided market where shoppers can find their preferred stores. Stores would operate without the platform, but perhaps not as many, and not as efficiently. Newspapers, search engines, and other online platforms are two-sided markets that bring together advertisers and eyeballs that might not otherwise find each other absent the platform. And a collegiate multimedia rights management firms is a two-sided market where colleges that want to sell advertising space get together with firms that want to advertise their goods and services.

Yet there is nothing particularly “transformative” about the outsourcing of MMR management. Credit cards, for example are qualitatively different than in-store credit operations. They are two-sided platforms that substitute for in-house operations — but they also create an entirely new product and product market. MMR marketing firms do lower some transaction costs and reduce risk for collegiate sports marketing, but the product is not substantially changed — in fact, schools must have the knowledge and personnel to assess and enter into the initial sale of MMRs to an intermediary and, because of ongoing revenue-sharing and coordination with the intermediary, must devote ongoing resources even after the initial sale.

But will a merged entity have “too much” power? Imagine if a single firm owned the MMRs for nearly all intercollegiate competitors. How would it be able to exercise its supposed market power? Because each deal is negotiated separately, and, other than some mundane, fixed back-office expenses, the costs of rights management must be incurred whether a firm negotiates one deal or 100, there are no substantial economies of scale in the purchasing of MMRs. As a result, the existence of deals with other schools won’t automatically translate into better deals with subsequent schools.

Now, imagine if one school retained its own MMRs, but decided it might want to license them to an intermediary. Does it face anticompetitive market conditions if there is only a single provider of such services? To begin with, there is never only a single provider, as each school can provide the services in-house. This is not even the traditional monopoly constraint of simply “not buying,” which makes up the textbook “deadweight loss” from monopoly: In this case “not buying” does not mean going without; it simply means providing for oneself.

More importantly, because the school has a monopoly on access to its own marketing rights (to say nothing of access to its own physical facilities) unless and until it licenses them, its own bargaining power is largely independent of an intermediary’s access to other schools’ rights. If it were otherwise, each school would face anticompetitive market conditions simply by virtue of other schools’ owning their own rights!

It is possible that a larger, older firm will have more expertise and will be better able to negotiate deals with other schools — i.e., it will reap the benefits of learning by doing. But the returns to learning by doing derive from the ability to offer higher-quality/lower-cost services over time — which are a source of economic benefit, not cost. At the same time, the bulk of the benefits of experience may be gained over time with even a single set of MMRs, given the ever-varying range of circumstances even a single school will create: There may be little additional benefit (and, to be sure, there is additional cost) from managing multiple schools’ MMRs. And whatever benefits specialized firms offer, they also come with agency costs, and an intermediary’s specialized knowledge about marketing MMRs may or may not outweigh a school’s own specialized knowledge about the nuances of its particular circumstances. Moreover, because of knowledge spillovers and employee turnover this marketing expertise is actually widely distributed; not surprisingly, JMI Sports’ MMR unit, one of the most recent and successful entrants into the business was started by a former employee of IMG. Several other firms started out the same way.

The right way to begin thinking about the issue is this: Imagine if MMR intermediaries didn’t exist — what would happen? In this case, the answer is readily apparent because, for a significant number of schools (about 37% of Division I schools, in fact) MMR licensing is handled in-house, without the use of intermediaries. These schools do, in fact, attract advertisers, and there is little indication that they earn less net profit for going it alone. Schools with larger audiences, better targeted to certain advertisers’ products, command higher prices. Each school enjoys an effective monopoly over advertising channels around its own games, and each has bargaining power derived from its particular attractiveness to particular advertisers.

In effect, each school faces a number of possible options for MMR monetization — most notably a) up-front contracting to an intermediary, which then absorbs the risk, expense, and possible up-side of ongoing licensing to advertisers, or b) direct, ongoing licensing to advertisers. The presence of the intermediary doesn’t appreciably change the market, nor the relative bargaining power of sellers (schools) and buyers (advertisers) of advertising space any more than the presence of temp firms transforms the fundamental relationship between employers and potential part-time employees.

In making their decisions, schools always have the option of taking their MMR management in-house. In facing competing bids from firms such as IMG or Learfield, from their own conferences, or from professional sports teams, the opening bid, in a sense, comes from the school itself. Even the biggest intermediary in the industry must offer the school a deal that is at least as good as managing the MMRs in-house.

The true relevant market: Advertising

According to economist Andy Schwarz, if the relevant market is “college-based marketing services to Power 5 schools, the antitrust authorities may have more concerns than if it’s marketing services in sports.” But this entirely misses the real market exchange here. Sure, marketing services are purchased by schools, but their value to the schools is independent of the number of other schools an intermediary also markets.

Advertisers always have the option of deploying their ad dollars elsewhere. If Coca-Cola wants to advertise on Auburn’s stadium video board, it’s because Auburn’s video board is a profitable outlet for advertising, not because the Auburn ads are bundled with advertising at dozens of other schools (although that bundling may reduce the total cost of advertising on Auburn’s scoreboard as well as other outlets). Similarly, Auburn is seeking the highest bidder for space on its video board. It does not matter to Auburn that the University of Georgia is using the same intermediary to sell ads on its stadium video board.

The willingness of purchasers — say, Coca-Cola or Toyota — to pay for collegiate multimedia advertising is a function of the school that licenses it (net transaction costs) — and MMR agents like IMG and Learfield commit substantial guaranteed sums and a share of any additional profits for the rights to sell that advertising: For example, IMG recently agreed to pay $150 million over 10 years to renew its MMR contract at UCLA. But this is the value of a particular, niche form of advertising, determined within the context of the broader advertising market. How much pricing power over scoreboard advertising does any university, or even any group of universities under the umbrella of an intermediary have, in a world in which Coke and Toyota can advertise virtually anywhere — including during commercial breaks in televised intercollegiate games, which are licensed separately from the MMRs licensed by companies like IMG and Learfield?

There is, in other words, a hard ceiling on what intermediaries can charge schools for MMR marketing services: The schools’ own cost of operating a comparable program in-house.

To be sure, for advertisers, large MMR marketing firms lower the transaction costs of buying advertising space across a range of schools, presumably increasing demand for intercollegiate sports advertising and sponsorship. But sponsors and advertisers have a wide range of options for spending their marketing dollars. Intercollegiate sports MMRs are a small slice of the sports advertising market, which, in turn, is a small slice of the total advertising market. Even if one were to incorrectly describe the combined entity as a “juggernaut” in intercollegiate sports, the MMR rights it sells would still be a flyspeck in the broader market of multimedia advertising.

According to one calculation (by MoffettNathanson), total ad spending in the U.S. was about $191 billion in 2016 (Pew Research Center estimates total ad revenue at $240 billion) and the global advertising market was estimated to be worth about $493 billion. The intercollegiate MMR segment represents a minuscule fraction of that. According to Jason Belzer, “[a]t the time of its sale to WME in 2013, IMG College’s yearly revenue was nearly $500 million….” Another source puts it at $375 million. Either way, it’s a fraction of one percent of the total market, and even combined with Learfield it will remain a minuscule fraction. Even if one were to define a far narrower sports sponsorship market, which a Price Waterhouse estimate puts at around $16 billion, the combined companies would still have a tiny market share.

As sellers of MMRs, colleges are competing with each other, professional sports such as the NFL and NBA, and with non-sports marketing opportunities. And it’s a huge and competitive market.

Barriers to entry

While capital requirements and the presence of long-term contracts may present challenges to potential entrants into the business of marketing MMRs, these potential entrants face virtually no barriers that are not, or have not been, faced by incumbent providers. In this context, one should keep in mind two factors. First, barriers to entry are properly defined as costs incurred by new entrants that are not incurred by incumbents (no matter what Joe Bain says; Stigler always wins this dispute…). Every firm must bear the cost of negotiating and managing each schools’ MMRs, and, as noted, these costs don’t vary significantly with the number of schools being managed. And every entrant needs approximately the same capital and human resources per similarly sized school as every incumbent. Thus, in this context, neither the need for capital nor dedicated employees is properly construed as a barrier to entry.

Second, as the DOJ and FTC acknowledge in the Horizontal Merger Guidelines, any merger can be lawful under the antitrust laws, no matter its market share, where there are no significant barriers to entry:

The prospect of entry into the relevant market will alleviate concerns about adverse competitive effects… if entry into the market is so easy that the merged firm and its remaining rivals in the market, either unilaterally or collectively, could not profitably raise price or otherwise reduce competition compared to the level that would prevail in the absence of the merger.

As noted, there are low economies of scale in the business, with most of the economies occurring in the relatively small “back office” work of payroll, accounting, human resources, and employee benefits. Since the 2000s, the entry of several significant competitors — many entering with only one or two schools or specializing in smaller or niche markets — strongly suggests that there are no economically important barriers to entry. And these firms have entered and succeeded with a wide range of business models and firm sizes:

  • JMI Sports — a “rising boutique firm” — hired Tom Stultz, the former senior vice president and managing director of IMG’s MMR business, in 2012. JMI won its first (and thus, at the time, only) MMR bid in 2014 at the University of Kentucky, besting IMG to win the deal.
  • Peak Sports MGMT, founded in 2012, is a small-scale MMR firm that focuses on lesser Division I and II schools in Texas and the Midwest. It manages just seven small properties, including Southland Conference schools like the University of Central Arkansas and Southeastern Louisiana University.
  • Fox Sports entered the business in 2008 with a deal with the University of Florida. It now handles MMRs for schools like Georgetown, Auburn, and Villanova. Fox’s entry suggests that other media companies — like ESPN — that may already own TV broadcast rights are also potential entrants.
  • In 2014 the sports advertising firm, Van Wagner, hired three former Nelligan employees to make a play for the college sports space. In 2015 the company won its first MMR bid at Florida International University, reportedly against seven other participants. It now handles more than a dozen schools including Georgia State (which it won from IMG), Loyola Marymount, Pepperdine, Stony Brook, and Santa Clara.
  • In 2001 Fenway Sports Group, parent company of the Boston Red Sox and Liverpool Football Club, entered into an MMR agreement with Boston College. And earlier this year the Tampa Bay Lightning hockey team began handling multimedia marketing for the University of South Florida.

Potential new entrants abound. Most obviously, sports networks like ESPN could readily follow Fox Sports’ lead and advertising firms could follow Van Wagner’s. These companies have existing relationships and expertise that position them for easy entry into the MMR business. Moreover, there are already several companies that handle the trademark licensing for schools, any of which could move into the MMR management business, as well; both IMG and Learfield already handle licensing for a number of schools. Most notably, Fermata Partners, founded in 2012 by former IMG employees and acquired in 2015 by CAA Sports (a division of Creative Artists Agency), has trademark licensing agreements with Georgia, Kentucky, Miami, Notre Dame, Oregon, Virginia, and Wisconsin. It could easily expand into selling MMR rights for these and other schools. Other licensing firms like Exemplar (which handles licensing at Columbia) and 289c (which handles licensing at Texas and Ohio State) could also easily expand into MMR.

Given the relatively trivial economies of scale, the minimum viable scale for a new entrant appears to be approximately one school — a size that each school’s in-house operations, of course, automatically meets. Moreover, the Peak Sports, Fenway, and Tampa Bay Lightning examples suggest that there may be particular benefits to local, regional, or category specialization, suggesting that innovative, new entry is not only possible, but even likely, as the business continues to evolve.

Conclusion

A merger between IMG and Learfield should not raise any antitrust issues. College sports is a small slice of the total advertising market. Even a so-called “juggernaut” in college sports multimedia rights is a small bit in the broader market of multimedia marketing.

The demonstrated entry of new competitors and the transitions of schools from one provider to another or to bringing MMR management in-house, indicates that no competitor has any measurable market power that can disadvantage schools or advertisers.

The term “juggernaut” entered the English language because of misinterpretation and exaggeration of actual events. Fears of the IMG/Learfield merger crushing competition is similarly based on a misinterpretation of two-sided markets and misunderstanding of the reality of the of the market for college multimedia rights management. Importantly, the case is also a cautionary tale for those who would identify narrow, contract-, channel-, or platform-specific relevant markets in circumstances where a range of intermediaries and direct relationships can compete to offer the same service as those being scrutinized. Antitrust advocates have a long and inglorious history of defining markets by channels of distribution or other convenient, yet often economically inappropriate, combinations of firms or products. Yet the presence of marketing or other intermediaries does not automatically transform a basic, commercial relationship into a novel, two-sided market necessitating narrow market definitions and creative economics.